M M PARIKH INCOME TAX OFFICER SPECIAL INVESTIGATION CIRCLE B AHMEDABAD Vs. NAVANAGAR TRANSPORT AND INDUSTRIES LIMITED

JUDGEMENT

(1.) M/s. Navanagar Transport and Industries Ltd.- hereinafter called 'the assessed' -- is a company in which "the public are not substantially interested" within the meaning of S. 23-A of the Income Tax Act, 1922. At the annual general meeting held on December 4, 1957, the Company declared Rs. 8,767 as dividend payable to the share-holders for the year Ending March 31, 1957. The Income-tax Officer, Special Investigation Circle, Ahmedabad, determined the taxable income of the assessee for the assessment year 1957-58 at Rs. 1,10769. Since the dividend declared by the Company was less than the statutory percentage of the total income of the Company, as reduced by the taxes specified in Cls. (a) and (b) of sub-s. (1) of S. 23-A, the Income-tax Officer issued a notice on November 15, 1961 calling upon the assessee to show cause why an order under S. 23-A should not be made for the assessment year 1957-58 and submitted the record to the Inspecting Assistant Commissioner seeking permission under sub-s. (8). The assessee then applied to the High Court of Gujarat under Art. 226 of the Constitution for a writ of mandamus restraining the Income-tax Officer from giving effect to the notice under S. 23-A against the assessee.

(2.) The High Court held that an order under S. 23-A of the Income Tax Act, 1922, after its amendment by the Finance Act, 1955, is an "order of assessment" to which the period of limitation prescribed by S. 34 (3) applies and since such an order cannot he made after the expiration of four years from the end of the assessment year 1957-58 the proceedings initiated against the assessee in respect of the assessment year 1957-58 after March 31, 1962 was without jurisdiction. The Income-tax Officer has appealed to this Court with certificate granted by the High Court.

(3.) Section 23-A has undergone changes from time to time. Before it was amended by the Finance Act, 1955, S. 23-A was enacted that where the Income-tax Officer is satisfied, that the dividends distributed by the Company are less than sixty per cent of the assessable income of the Company as reduced by the income-tax and super-tax payable by the Company, he shall make an order (except in certain circumstances specified) that the undistributed portion of the assessable income of the Company computed for income-tax purposes as reduced by the income-tax and super-tax in respect thereof be deemed to have been distributed as dividends among the share-holders and thereupon the proportionate share of each shareholder shall be included in the total income of each share-holder for the purpose of assessing his total income. Before an order under S. 23-A, as it then stood, became effective, two steps had to be taken - (i) an order had to be made that the undistributed portion of the assessable income of the Company shall be deemed to have been distributed as dividends among the shareholders, and (ii) the deemed income of each share-holder had to be included in the total Income of such share-holder for the purpose of assessing his total income. An order declaring that the undistributed portion of the income shall be deemed to have been distributed was not an order of assessment:the order of assessment was made only when the Income-tax Officer took action against each share-holder for bringing the deemed income of each share-holder to tax in his individual assessment. The Legislature did not provide any period of limitation for making an order declaring that the undistributed portion of the income shall be deemed to be distributed as dividends. But since the order had to be followed up in the assessments of the share-holders individually, the order would, if made, be ineffective, if it was not made within the period prescribed by S. 34 (3):See Commr., of Income-tax Bombay City 1 vs. Robert J. Sas, 48 ITR (SC) 177. The procedure for bringing to tax undistributed income of companies which distributed less than the statutory percentage of its total income was clumsy and dilatory. Before tax could be recovered, enquiry had to be made into the matters referred to in S. 23-A (1) and also whether the Company was one in which the public were not substantially interested, and after the order was made, each individual share-holder had to be separately assessed in respect of the deemed income.